Thursday, January 29, 2009
"Nobody Knows What These Assets Are Worth"
You've heard that one, right? That banks are sitting on trillions of dollars of securities, state on their books that those securities have a specific value, but that "nobody knows" what they're actually worth? Even though, not so long ago, those same securities were traded on the market and everybody "knew" what they were worth?
Let's be honest for a moment: It's easy to figure out what the securities are worth. Put them up for sale. The price somebody is willing to pay for them? That's what they're worth. The protest, "But once financial markets settle down and the economy becomes more normal, they could be worth a lot more"? Sure. But the person who is buying the securities in the current market is considering that when setting a price. Gasoline may be back up to $4/gallon next fall; but that doesn't mean I'm going to buy gas at a station that wants to charge me $4/gallon today. (If I believe gas is going to go up to $4/gallon, I might buy futures, but I'm not going to buy them at $4/gallon.)
We're caught between financial institutions that claim, "We don't know what these securities are worth" because they don't want to establish a market price that would render them insolvent, and a government hoping to rescue those same financial institutions from insolvency without creating a massive public uproar that they're paying tens or hundreds of billions of dollars over market for some extraordinarily risky securities. And we're supposed play along because the consequence of establishing a market price could make everything a lot worse.